Overview

Main Menu Name: §303

Tests to see if a shareholder such as an estate is entitled to Section 303 protection. It also calculates the amount of stock that can be redeemed under Section 303.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This calculation determines if a shareholder such as an estate is entitled to §303 protection. It also calculates the amount of stock that can be redeemed under §303.

IRC §303 allows a corporation to redeem (buy back) a portion of a decedent's stock with a distribution that will not be taxed as a dividend. §303 redemption can provide cash (or other property) from the corporation without income tax at the shareholder level.

§303 is useful when the shareholder's family wants to retain control of a close or family corporation after the shareholder's death. A shareholder's family may find it particularly useful when the corporation's stock is the estate's primary asset, and the family is unable to pay death taxes and other expenses without a forced liquidation of the business.

The following conditions must be met to entitle a shareholder to a §303:

• The stock to be redeemed is a part of the decedent's gross estate.
• The stock's value is more than 35% of the decedent's gross estate minus deductions allowed for funeral and administrative expenses, debts, taxes, and losses acquired during administration.
• The amount redeemed is no more than the total of (a) federal estate, state death, and generation skipping transfer taxes and the interest on those amounts, and (b) funeral and administration expenses (whether or not claimed as a deduction on the federal estate tax return).
• Expenses incurred by the decedent's death, administrative expenses, and generation skipping transfer taxes reduce the interest of the shareholder whose stock is being redeemed.

The tax implications of §303 redemption are:

• The amount paid to the estate or other seller will be treated as an exchange and not as a dividend. If the stock receives a step up in basis to its value at the shareholder's death, and the corporation pays exactly this price for it, no gain is recognized. If the corporation pays more than the new basis for the stock, the resulting gain is taxed as long-term capital gain with a maximum tax rate of 20%.
• Attribution rules do not apply to §303 redemptions.

Getting Started

IRC Section 303 allows a corporation to redeem a portion of a decedent's stock with a distribution that will not be taxed as a dividend. A Section 303 redemption can provide cash (or other property) from the corporation without tax at the shareholder level.

Section 303 is useful when the shareholder's family wants to retain control of a close or family corporation after the shareholder's death. A shareholder's family may find it particularly useful when the corporation's stock is the estate's primary asset, and the family is unable to pay death taxes and other expenses without a forced liquidation of the business.

The following conditions must be met to entitle a shareholder to a Section 303:

• The stock to be redeemed is a part of the decedent's gross estate.
• The stock's value is more than 35% of the decedent's gross estate minus deductions allowed for funeral and administrative expenses, debts, taxes, and losses acquired during administration.
• The amount redeemed is no more than the total of (a) federal estate, state death, and generation skipping transfer taxes and the interest on those amounts, and (b) funeral and administration expenses (whether or not claimed as a deduction on the federal estate tax return). Any amount over this total will be taxed under code Section 302 rules.
• Expenses incurred by the decedent's death, administrative expenses, and generation skipping transfer taxes reduce the interest of the shareholder whose stock is being redeemed.

The tax implications of a §303 redemption are:

• The amount paid to the estate will be treated as an exchange and not as a dividend. If the stock receives a step up in basis to its value at the shareholder's death and the corporation pays this price for it, no gain is recognized.
• Attribution rules do not apply to §303 redemptions.

Entering Data

1. Federal Estate Tax Value of Corporate Stock:  Enter the federal estate tax value of the corporate stock included in the gross estate.
2. Adjusted Gross Estate:  Enter the adjusted gross value of the estate. The adjusted value includes reductions for funeral and administrative expenses, debts, certain taxes, and losses acquired during administration.
3. Funeral and Administration Expenses:  Enter the total amount of expenses incurred by funeral and administration costs.
4. Federal Estate Tax:  Enter the amount of expenses incurred by federal estate taxes.
5. State Death Tax:  Enter the amount of expenses incurred by state death taxes.
6. Generation Skipping Transfer Tax:  Enter the amount of expenses incurred by generation skipping transfer taxes.
7. Interest Collected as Part of Above Taxes:  Enter the amount of interest collected as part of the taxes listed in the previous entry fields.

Results

The Summary Tab indicates whether a shareholder (such as an estate) is qualified for the protection of Section 303. To determine this, the calculation determines 35% of the Adjusted Gross Estate. If this value is greater than the stock value, the estate qualifies for Section 303. The calculation also totals all expenses and taxes specified at the expenses and taxes inputs. This total is the maximum allowable Section 303 redemption and is displayed in the calculation results.